Poll expects strong start of 2013 not to last for U.S. economy

After a strong start to the year, the world's largest economy is set to slow as some of the effects of government spending cuts take hold, likely leaving the central bank's extraordinary stimulus in place into at least 2014.

Still, the labor market is expected to continue healing this year, even after last month's disappointingly weak job gains, and the housing recovery should gain momentum. Both should help keep the economy from cooling too much.

Economists in a Reuters poll taken after the latest job report ratcheted up their forecasts for first quarter growth to an annualized 3 percent from the 2 percent forecast last month.

But that pace is not expected to last, slowing to 1.6 percent in the second quarter before picking up to 2 percent for the rest of the year.

While the consensus for the first quarter is the highest since polling began for that period in October 2011, the second quarter expectation in the poll is the lowest.

"We are expecting growth to slow but I wouldn't throw this into the category of another 'spring slowdown'," said Michael Gapen, senior U.S. economist at Barclays Capital.

A solid start followed by a weaker spring has been the norm for the economy in recent years, though past years have had more to do with flare-ups in the euro zone debt crisis, said Gapen.

"This year, we think it's mainly a very large fiscal policy drag in the U.S.," he said, estimating that fiscal tightening will take 1.8 percentage points off of growth this year compared to 1 percent in each of the past two years.

SPENDING CUTS STARTING TO HURT

Across-the-board government spending cuts of $85 billion went into effect at the beginning of March.

Beyond reducing spending, the hit to the economy could also show up through actions such as furloughs, job cuts or lost contracts in the private defense sector.

Truck and military vehicle maker Oshkosh Corp (OSK.N) said on Tuesday it will cut about 900 jobs in its defense business due to U.S. budget cuts.

Consumer spending could also cool after holding up surprisingly well in the first months of 2013.

Payroll taxes increased at the beginning of the year and economists expect that could prompt Americans to curb purchases. Consumer activity makes up about two-thirds of the U.S. economy.

Tighter fiscal policy and an economic recovery that is still vulnerable to setbacks suggest that the Federal Reserve will leave its stimulus efforts in place for at least another year.

"The key offset has been monetary policy. I think in this battle between fiscal drag and monetary stimulus, the Fed is winning," said Jim O'Sullivan, chief U.S. economist at High Frequency Economics.

The Fed is currently buying $85 billion a month in assets to keep borrowing rates down and boost the economy.

The latest round of quantitative easing - known as "QE3" - is open-ended, and the central bank has said it will continue the program until the labor market outlook improves substantially.

The number of analysts calling for the Fed to end its current bond buying program this year has gradually come down over the last three months.

Thirty-five of 45 analysts anticipated the Fed would end its current round of QE not this year, but in 2014.

Only seven respondents expected the Fed to end its bond purchases later this year, while the remaining three thought the central bank would extend the program out to 2015.

Of those that forecast 2014, the majority said the purchases would end sometime during the first half of the year.

STILL SLOW IMPROVEMENT IN JOB MARKET

Economists expect the unemployment rate to steadily improve this year, with a median forecast of 7.6 percent for 2013, down from the 7.7 percent seen in January's poll.

Although that consensus for this year is the lowest since polling began for that period in January 2012, a majority, 33 of 48, expect the unemployment rate to fall to the Fed's target of 6.5 percent only in 2015. Ten said that would to happen sometime next year and the remaining five said only in 2016.

Housing, long the thorn in the economy's side, will likely build on the recovery it began last year with a 7.1 percent gain in home prices in 2013. That is expected to slow to a 5 percent rise the following year. Both figures are sharply higher than the 4.2 percent and 3.4 percent consensus figures from January.